DEFINITION of 'Currency Binary'

A currency trade that offers an all-or-nothing payoff based on a given currency exchange rate when the position reaches its expiration date. Binaries have a single payoff amount rather than the variable profit amounts found in traditional options.

Binary trades can be used for either hedging purposes (such as downside protection for assets held in a specific currency) or as a speculative bet on the direction a specific exchange rate will move. The going premium on a currency binary represents the consensus "odds" that the strike exchange rate will be reached by expiration. An investor or trader can also sell (short) a currency binary position, reversing the payoff options and effectively betting that the exchange rate will fall.

BREAKING DOWN 'Currency Binary'

Currency binaries represent a rather young trading strategy, and not all currency exchange rates are currently being traded. The majority of positions are for the EUR/USD, GBP/USD and USD/YEN based on their very liquid forex markets.

For example, assume that the exchange rate for the EUR/USD is currently 1.25; an investor who buys a currency binary at a strike exchange rate of 1.30 is betting that the exchange rate will be 1.30 or greater on the expiration date. If this occurs, the investor will receive a set payoff amount, no matter how far above 1.30 the exchange rate settles. If the exchange rate at expiration is less than 1.30, the long investor receives nothing.

RELATED TERMS
  1. Cash-Or-Nothing Call

    An exotic option whose payoff is a predetermined amount (sometimes ...
  2. Currency Option

    A contract that grants the holder the right, but not the obligation, ...
  3. Multi Index Option

    A type of investment in which the payoff depends on the difference ...
  4. Average Price Put

    A type of option where the payoff depends on the difference between ...
  5. Net Payoff

    The profit (or loss) from the sale of an item after the costs ...
  6. Average Price Call

    A type of option where the payoff is either zero or the amount ...
Related Articles
  1. Trading

    Binary Options Strategies - Sponsored by Nadex

    Because of their all-or-nothing character, binary options offer traders a great way to trade on the direction of an asset or the overall market. And what makes binary options intriguing, besides ...
  2. Trading

    Binary Options

    A type of option where the payoff depends on both the price levels of the strike and the underlying asset, like standard options. If the binary option expires in the money, the trader will always ...
  3. Trading

    Applying Binary Options To Equity Markets

    A binary option payout depends on the outcome of a “yes” or “no” proposition, related to the difference between underlying asset price and strike price.
  4. Trading

    Trading Forex With Binary Options

    Binary options are an alternative way, with a major advantage, for traders to play the forex market.
  5. Trading

    Arbitrage Strategies With Binary Options

    Looking for arbitrage opportunities in Binary Options? Here are the ways to encash on those, with the opportunities, risks and limitations.
  6. Trading

    How to Trade Volatility Using Binary Options - Sponsored by Nadex

    Binary options are similar to classic options with some slight nuances but the components used for the option’s pricing are the same; underlying market, strike (K), volatility and time.
  7. Trading

    How The New NYSE Binary Options Work

    The New York Stock Exchange has launched its own version of binary options called Binary Return Derivatives Options or ByRDs.
  8. Trading

    Trading Using Binary Options

    Discover the securities and underlying assets you can trade using binary options in the US.
  9. Insights

    Why Searches for Binary Options Spiked Six Fold

    You've been searching for binary options a lot lately. We wondered why.
RELATED FAQS
  1. How do you make money trading money?

    Trading money, particularly in the forex market, is a speculative risk, as you are betting that the value of a currency will ... Read Answer >>
Hot Definitions
  1. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  2. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  3. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  4. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  5. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  6. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
Trading Center